Australia | Sep 26 2007
By Chris Shaw
For some time a large section of the broking community has struggled to find value in Sims Group (SGM), taking the view while short-term scrap prices are boosting earnings longer-term prices would come back to more sustainable levels and bring the share price with it.
Others are more bullish on the scrap metal outlook and see the stock as a Buy, notwithstanding the gains the share price has enjoyed over the past several months as the stock has run from around $20 in December to more than $30 dollars now, this despite an earnings guidance downgrade earlier this month.
No surprise then the market has a mixed view on the company’s proposed merger with Metal Management in the US, a move Credit Suisse notes will make the combined group the largest scrap recycler in the world.
One broker that likes the deal but doesn’t see value in the stock at present is JP Morgan, who commends management for making the deal using its over-valued (in the broker’s view) scrip, which makes the deal significantly accretive in both earnings and valuation terms.
In terms of earnings the group sees a modest negative impact in FY08 as the deal is bedded down but estimates it will prove to be around 5% accretive in FY09 and 7% in FY10. In valuation terms the benefits are more pronounced, the broker estimating the transaction lifts its valuation by almost 18% to $25.46.
Credit Suisse adopts a similar position, lifting its earnings forecasts for FY09 by 8% but retaining its Underperform rating on valuation grounds. The broker is forecasting FY09 EPS (earnings per share) of 236.8c and in FY10 of 232.7c, which is above the JP Morgan estimates of 208.1c and 211.4c respectively.
ABN Amro takes a more middle ground view on the stock, suggesting while the deal should provide a boost to earnings the stock is now around fair value in P/E terms. The broker estimates it is trading on a FY09 P/E at current levels of almost 19x, well above the Credit Suisse forecast of around 14x. JP Morgan suggests the current P/E is around 16x compared to a historical average of 11x, which reinforces its view the stock is over-priced at current levels.
Citi is another that remains neutral on the outlook for the stock, the broker pointing out the merger will increase the volatility of group earnings at the same time as it effectively passes control of the group to Metal Management given the structure of the deal.
The bull on the scrap metal market is Macquarie, the broker taking the view the deal will benefit both sets of shareholders and create significant value. With Asian steel demand expected to remain strong in coming years the broker is forecasting EPS of 246.9c in FY09 and 280.8c in FY10, while it has lifted its target price to $35.00 from $32.00 to account for the merger.
According to the FNArena database this leads the way in terms of share price targets for the stock, well above laggard UBS at $23.70. The wide range confirms the mixed opinions on the stock, the database showing it is rated as Buy twice, Accumulate once, Hold three times and Sell four times with an average target price of $28.30, up from $27.30 prior to the announcement of the merger.
As a means of comparison, Thomson One Analytics had a pre-deal median target price on the stock of $26.00. Shares in Sims this morning are little changed and at 10.55am the stock was 5c higher at $33.15.